Friday, January 27, 2012

What does it mean to "exploit the poor"?

[First (or maybe second depending on how you count) in a (short) series co-authored with guest blogger Don Geddis]

Don,

Before our discussion outgrows the comment thread it started in I'd like to move it out here to the main page. Privately you expressed some reservations about participating in this exchange because you're not a macroeconomist. Well, neither am I, and IMHO neither are most macroeconomists. If you haven't already, you really should watch the movie "Inside Job." It documents (among other things) how the economics profession has been thoroughly corrupted by Wall Street. Apart from the fact that one should never accept arguments from authority to begin with, economists IMHO have no authority.

exploit (verb): 1) to take unfair advantage of 2) to control or take advantage of by artful, unfair, or insidious means

Do I really need to explain this? If we're engaged in a negotiation and I'm rich and you're poor then I might choose to proceed on the assumption that you need my money more than I need your labor, because if I fail to obtain your labor then maybe my profits will go down by some unmeasurably small increment, but if you fail to obtain my money your children will go hungry. So even though the incremental value of your labor to me might be X I might decide to offer you Y<<X (for you non-geeks, that means Y is much less than X) instead knowing that you have a strong incentive to accept this offer even though I would actually be willing to pay you more if you had any leverage. But you don't, so I'm not. Having come to this realization, I might further decide that it is in my interests to deploy my resources so that you remain poor. Of course, I don't think of this as insuring that you remain poor, I think of it as insuring a ready supply of cheap labor. But it amounts to the same thing.

This is the fundamental problem: labor is unlike other commodities. If we have a surplus of wheat that causes the bottom to fall out of the wheat market and excess wheat to rot in silos, the wheat doesn't care. But labor does care because, to paraphrase Mitt Romney, labor is people, my friend. And labor has children that aren't going to stop needing food just because society has no present need for what their parents have to offer in the way of tradable goods and services.

To your second point, that the economic conditions of 2005 were not the cause of the Great Recession. We don't actually disagree about the macroeconomics. The Fed may well have exacerbated the situation with its too-tight monetary policy. I don't know, and we can never know for certain. Maybe the current crisis would have been averted. Or maybe we would have ended up with Weimar-Republic-style hyperinflation. We simply don't know because we didn't do that experiment, and one of the problems with economics is it's very hard to reset the initial conditions so you can try again.

But all this misses the point. Debating whether the housing bubble or the Fed caused the Great Recession is a philosophical argument. What matters is not whether the sub-prime crisis or the Fed's decision was more to blame, what matters is that the sub-prime crisis is what led the Fed to have to make that decision in the first place. It is in this sense that the G.R. can fairly be attributed to the conditions that obtained in 2005, even if subsequent events might have played out differently. (Note that the exact same argument is used to try to blame Obama for the G.R. Interestingly, and tellingly, there are two different explanations for how Obama caused the G.R.: some say it's because the stimulus was too big, and others say it's because it was too small. Both sides can't be right. And, I note in passing, both sides count economists among their ranks.)

I think it is indisputable that the rapid expansion of credit to non-credit-worthy borrowers and the resulting bubble in the housing market and rise in mortgage delinquencies was unsustainable (and this was evident in 2005). Something would have had to end it sooner or later, and it seems unlikely in the extreme that it could have been ended by anything other than a crisis because, as is also painfully evident in retrospect, in the absence of a crisis it was all but impossible to convince anyone that there was a problem that needed solving.